Guidance

Gigabit Infrastructure Subsidy Scheme (GIS) - Guidance: Clawback

Updated 18 December 2023

1. What is clawback?

Clawback refers to the repayment of any excess subsidy that may have been granted to and received by a beneficiary of subsidy via the UK Subsidy Control regime.

In the case of the roll out of a subsidised broadband network under the GIS, it refers to the need for an implementing body to recover any excess subsidy that has been received by the beneficiary supplier.

2. Why is it needed?

It is a requirement of the GIS scheme to implement appropriate monitoring and to apply clawback mechanisms to ensure that the successful supplier is not over compensated and to ensure that the subsidy provided is the minimum required. Overcompensation could arise in a number of ways:

• in the event that the actual cost of deploying the infrastructure is less than the estimated cost for the survey and build; and
• if demand for and take up for wholesale active services is greater than originally expected, so that the level of public subsidy received by the supplier is shown to be higher than necessary.
• additional services resulting from the use of passive products or high bandwidth products other than broadband usage of the infrastructure.

While a supplier may benefit from subsidy provided resulting from a cleared Subsidy Control clearance (in this case, from BDUK as National Competence Centre), that aid must remain the minimum necessary to deliver the objective of the aid (i.e. delivery of gigabit capable broadband infrastructure and services in an area where the market has not delivered and where there are no credible and concrete plans to deliver). The minimum level necessary is based on a number of factors which are subject to change. It is possible that changes in those factors (e.g. higher take-up than originally anticipated) could mean the supplier has benefited from excess aid.

Notwithstanding that payment will not be made in advance of costs being incurred, with the structure of the gap funding model, we still need to guard against the risk of excess subsidy being paid, so GIS scheme requires that appropriate clawback mechanisms are included in the contract with the successful supplier. Through these mechanisms, it is possible to retrospectively adjust the amount of aid from which the supplier has benefited to limit over compensation.

3. How should the clawback be repaid? Can it be re-invested in the broadband network?

In a gap ­funding model, the clawback mechanisms should require the supplier to repay the clawback amount to the implementing body: (i) as soon as it becomes due, based on the calculation of claw­back in the contract ; and (ii) as soon as the forecast take­up levels and/or any additional services revenues trigger the supplier to recognise it as contingent liability or provision in its financial accounts.

In other models where this approach is inappropriate (such as some public ownership models), the clawback mechanism will instead require the supplier to repay the clawback amount to the implementing body at the end of the contract.

It is for the implementing body to decide how to use any repaid clawback. The contract with the supplier must not include any conditions as to its use (such as requiring its re­investment with the supplier).

If the implementing body decides to invest the clawback in further broadband deployment, it is only possible to re-invest this in the existing contract in compliance with UK public procurement rules.

4. Overview of clawback mechanisms in the GIS Scheme for gap ­funding

Three monitoring and clawback mechanisms will be in place under the contracts for the GIS scheme.

Planning and Build True-Up Clawback An initial true up will take place after the initial design stage and a further true up following completion of the infrastructure build. This will ensure that only the minimum amount of aid is paid to suppliers for the build. The contract will include a list of Eligible Expenditure which will be eligible for subsidy. Any expenditure against the contract will need to be evidenced through invoices linked to design and build against the project plan and premises.

Active and passive services clawback will be in place for the remainder of the term of the contract to ensure that any under-estimation of take up in the suppliers’ bids and therefore additional revenue/profit from these additional connections results in an adjustment in the subsidy. Suppliers will be required to report against take up regularly from the commencement of the build phase and BDUK retains the right to undertake audits of these reports and associated systems of controls.

Active and passive services clawback is calculated by multiplying any additional customers over and above the number anticipated in the supplier’s financial model by a contractually agreed quarterly profit per customer figure. This gives an estimate for the excess profit achieved by the supplier over and above that is used to calculate the gap. This excess profit is shared between the supplier and the contracting authority in order to keep the incentive for suppliers to continue marketing and demand stimulation activities. At the end of the contract term, a final clawback amount is calculated as a one-off payment to ensure that the clawback captures an appropriate proportion of the value of the excess connections. The final clawback payment will be taken when the take-up has reached a steady-state (measured over four quarters), or where this does not occur, at the end of the term. The term of the contract will be calculated by reference to the average connection life of the technology being implemented.

Active and passive services clawback encompasses all services that result from additional use of the network (both passive and active) irrespective of usage and not limited to the provision of gigabit-capable broadband services. BDUK requires this as it is expected that there will be an increase in demand for fibre products for example, as a result of 5G roll-out. Additionally, the clawback mechanism will be utilised to capture additional usage of the network for other services such as wholesale or retail high bandwidth dedicated point-to-point or leased line service provision to business or other non-domestic end-users.

5. How long must the clawback mechanism be in place?

For Subsidy Control purposes, the monitoring stage which monitors take up and wholesale access obligations for the network will apply for a minimum of 7 years from the completion of the entire contracted build. The clawback mechanism must also be in place for a minimum of 7 years from completion of the entire contract build and a maximum of the defined revenue-generating life of the subsidised asset. The maximum length of the clawback period is determined at the point of awarding the contract.

6. How do I demonstrate compliance with the requirements of the GIS Scheme?

BDUK’s National Competence Centre will have assessed that the clawback mechanism in individual contracts are compliant with the requirements of the GIS scheme. Where the implementing body has adopted the clawback mechanism set out in BDUK’s template documents, there are unlikely to be any issues. On-going compliance will be maintained with the correct application of these (See 7. below)

7. What reporting is required on the clawback?

As part of receiving Subsidy Control approval from the NCC, implementing bodies will be required to regularly report on the operation of the clawback mechanism. These reporting and monitoring requirements will therefore also need to be incorporated in the implementing body’s contract with the supplier. This is reflected in the template set of reports specified in the contract documents for the GIS Scheme. BDUK retains the right to undertake audits of these reports and associated systems of controls